Discounted Stochastic Games with Voluntary Transfers

This paper studies discounted stochastic games perfect or imperfect public monitoring and the opportunity to conduct voluntary monetary transfers. We show that for all discount factors every public perfect equilibrium payoff can be implemented with a simple class of equilibria that have a stationary structure on the equilibrium path and optimal penal codes with a stick and carrot structure. We develop algorithms that exactly compute or approximate the set of equilibrium payoffs and find simple equilibria that implement these payoffs.Stochastic games, Monetary transfers, Computation, Imperfect public monitoring, Public perfect equilibria

In?nitely Repeated Games with Public Monitoring and Monetary Transfers

In this paper, we study in?nitely repeated games with imperfect public monitoring and the possibility of monetary transfers. We develop an effcient algorithm to compute the set of pure strategy public perfect equilibrium payoffs for each discount factor. We also show how all equilibrium payoffs can be implemented with a simple class of stationary equilibria that use stick-and-carrot punishments

Imperfect Legal Unbundling of Monopolistic Bottlenecks

We study an industry with a monopolistic bottleneck (e.g. a transmission network) supplying an essential input to several downstream firms. Under legal unbundling the bottleneck must be operated by a legally independent upstream firm, which may be partly or fully owned by an incumbent active in downstream markets. Access prices are regulated but the upstream firm can perform non-tariff discrimination. Under perfect legal unbundling the upstream firm maximizes only own profits; with imperfections it considers to some extend also the profits of its downstream mother. We find that reducing imperfections in legal unbundling (keeping ownership fixed) generally increases total output. Increasing the incumbent's ownership share increases total output if imperfections are sufficiently small, otherwise the effects are ambiguous. Surprisingly, higher ownership shares of the downstream incumbent may sometimes lead to lower degrees of imperfections. Our analysis suggests that consumers may benefit most from legal unbundling with strong regulation and parts of ownership given to a minority outside shareholder.Network industries, regulation, vertical relations, ownership, corruption, sabotage

Using Forward Contracts to Reduce Regulatory Capture

A fully unbundled, regulated network fi?rm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the ?firm contingent on realized downstream prices. Alternatively, the regulator can propose to the ?firm to sell the following forward contracts: the fi?rm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive fi?nancial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.Incentive regulation, regulatory capture, virtual power plants

In?nitely Repeated Games with Public Monitoring and Monetary Transfers

In this paper, we study in?nitely repeated games with imperfect public monitoring and the possibility of monetary transfers. We develop an effcient algorithm to compute the set of pure strategy public perfect equilibrium payoffs for each discount factor. We also show how all equilibrium payoffs can be implemented with a simple class of stationary equilibria that use stick-and-carrot punishments.

Discounted Stochastic Games with Voluntary Transfers

This paper studies discounted stochastic games perfect or imperfect public monitoring and the opportunity to conduct voluntary monetary transfers. We show that for all discount factors every public perfect equilibrium payoff can be implemented with a simple class of equilibria that have a stationary structure on the equilibrium path and optimal penal codes with a stick and carrot structure. We develop algorithms that exactly compute or approximate the set of equilibrium payoffs and find simple equilibria that implement these payoffs

Relational Contracting, Repeated Negotiations, and Hold-Up

We propose a unified framework to study relational contracting and hold-up problems in infinite horizon stochastic games. We first illustrate that with respect to long run decisions, the common formulation of relational contracts as Pareto-optimal public perfect equilibria is in stark contrast to fundamental assumptions of hold-up models. We develop a model in which relational contracts are repeatedly newly negotiated during relationships. Negotiations take place with positive probability and cause bygones to be bygones. Traditional relational contracting and hold-up formulations are nested as opposite corner cases. Allowing for intermediate cases yields very intuitive results and sheds light on many plausible trade-offs that do not arise in these corner cases. We establish a general existence result and a tractable characterization for stochastic games in which money can be transferred. This paper formulates a theory of relational contracting in dynamic games. A crucial feature is that existing relational contracts can depreciate and ensuing negotiations then treat previous informal agreements as bygones. The model nests the traditional formulation of relational contracts as Pareto-optimal equilibria as a special case. In repeated games both formulations are always mathematically equivalent. We provide ample illustrations that in dynamic games the traditional formulation is restrictive in so far that it rules out by assumption many plausible hold-up problems - even for small discount factors. Our model provides a framework that naturally unifies the analysis of relational contracting and hold-up problems

Decision Structures in Franchise Systems of the Plural Form

Many successful franchise chains directly own a positive fraction of stores --- a structure referred to as plural form. We propose that this ownership structure is chosen as a commitment not to expropriate franchisees. The theoretical model is based on an empirical analysis of contract and interview data from the US fast-food sector and well known stylized facts: First, franchisees typically have strong contractual obligations to implement activities selected by the chain. Second, franchisees pay a revenue-based royalty to the chain. Therefore, the chain has incentives to select inefficient activities that yield high revenues but are too costly. If uniform standards require that activities must be the same in company-owned and franchise stores, a substantial fraction of company-owned stores works as a commitment device to select more efficient activities. The theoretical analysis further predicts that a strong contractual commitment to uniform standards is preferable if the fraction of company-owned stores is sufficiently high. This prediction is supported by our data.franchising, plural form, contracts

Essays on Moral Norms, Legal Unbundling and Franchise Systems

This dissertation studies three, rather unrelated, topics, which are investigated in 4 independent chapters. Chapter 1 analyses a model of incomplete information with selfish rational types and types who comply with social or moral norms by intrinsic motivation. It explores ’complier optimal norms’, which maximize expected average utility of all compliant types given that the norms are commonly known. They are compared with rule-utilitarian norms, which maximize the sum of all players’ utility. Predictions under complier optimal norms match experimental evidence better and can explain a wide range of stylized facts, like conditional cooperation, costly punishment, the role of intentions, or concerns for social efficiency. It is shown that complier optimal norms arise from a model of voting-by-feet and can also be justified on moral grounds. Chapter 2 studies an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Different forms of ownership of the upstream firm by the downstream incumbent are analysed. In particular, there is a focus on a hybrid form between ownership separation and vertical integration called legal unbundling. In the model, legal unbundling means that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. The model allows for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling yields (weakly) higher quantities in the downstream market than vertical separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when allowing for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable. Chapter 3 extends the analysis of Chapter 2 by studying imperfect legal unbundling and partial ownership. Reducing imperfections in legal unbundling (keeping ownership fixed) generally increases total output. Increasing the incumbent's ownership share increases total output if imperfections are sufficiently small, otherwise the effects are ambiguous. Surprisingly, higher ownership shares of the downstream incumbent may sometimes lead to lower degrees of imperfections. The analysis suggests that consumers may benefit most from legal unbundling with strong regulation and parts of ownership given to a minority outside shareholder. Chapter 4 is motivated by the fact that many successful franchise chains directly own a positive fraction of stores, a structure referred to as plural form. It is proposed that this ownership structure is chosen as a commitment not to expropriate franchisees. The theoretical model is based on an empirical analysis of contract and interview data from the US fast-food sector and well known stylized facts: First, franchisees typically have strong contractual obligations to implement activities selected by the chain. Second, franchisees pay a revenue-based royalty to the chain. Therefore, the chain has incentives to select inefficient activities that yield high revenues but are too costly. If uniform standards require that activities must be the same in company-owned and franchise stores, a substantial fraction of company-owned stores works as a commitment device to select more efficient activities. The theoretical analysis further predicts that a strong contractual commitment to uniform standards is preferable if the fraction of company-owned stores is sufficiently high. This prediction is supported by our data.</p

Renegotiation-Proof Relational Contracts with Side Payments

We study infinitely repeated two player games with perfect information, where each period consists of two stages: one in which the parties simultaneously choose an action and one in which they can transfer money to each other. We first derive simple conditions that allow a constructive characterization of all Pareto-optimal subgame perfect payoffs for all discount factors. Afterwards, we examine different concepts of renegotiation-proofness and extend the characterization to renegotiation-proof payoffs